“Agriculture accounting” may not be words that most people have ever heard put together. But it is an area of financial management that has huge implications for the way we all live.
The people who produce our nation’s food, cotton, wool, leather, and other essentials (literally from the ground up) depend on it every day. In this post, we want to help those who are involved in ag operations have a better understanding of some of the “do’s and don’ts” when it comes to agriculture accounting.
Agriculture Accounting
“Agriculture accounting” isn’t like any other type of accounting. Even though it uses the same tools and procedures, due to the unique demands of the farming and ranching industry ag accounting has to be handled differently.
For that reason, many agriculture-related college degree programs (like the Agricultural Business major at the University of Tennessee – Martin…near one of our offices) focus on making sure those entering the ag industry understand how to apply those skills to the world of agriculture. It is important enough that other schools, like the University of Illinois Urbana-Champaign, even offer full degrees in Agricultural Accounting.
So what is “agriculture accounting” exactly?
It is the application of accounting principles to the distinctive and specialized needs of farmers and ranchers as they operate their businesses. Since the way things are done in those settings is different from an ordinary business, money has to be accounted for differently as well so that problems aren’t created down the road.
As a CPA firm with multiple locations across West Tennessee, we are familiar with farmers. It’s one of the largest industries in our part of the state, and a large number of our clients depend on our team having an expert understanding of how to apply accounting to agriculture.
Our goal is to help hard-working men and women in the farming community grow successful businesses that they can take pride in and pass along to future generations. Let’s dive in.
Farm Financial Reports
The 3 most important types of financial statements your business needs (regardless of what industry you are in) are:
- Monthly Income Statement (or P&L)
- Monthly Balance Sheet
- Cash Flow Report
While there are other reports you can look at to further gauge the financial health of your business, those 3 will give you a good overall idea of whether you are winning or losing with your money.
Those engaged in farming usually have little or no formal background in accounting and may find dealing with these kinds of reports frustrating. We totally understand.
However, our team of accounting pros not only has over 40 years of experience…they also work with farmers and other ag operation owners every single day. Here are some do’s and don’ts when it comes to farm financial reports.
DO
- DO give your accountant accurate information, so they can deliver reliable reports.
- DO make sure you see these reports at least every month.
- DO use the information they give you when you make big decisions.
DON’T
- DON’T think you can do it all yourself.
- DON’T just depend on your bank statement to judge the health of your finances.
Cash Flow Management in Agriculture
Cash is the lifeblood of a farm or ranch. It helps you measure how money flows into and out of your business. Good cash flow management in agriculture can make or break your entire operation. Of the 3 reports we just mentioned, it is arguably the most important.
DO
- DO update them regularly. How often depends on the nature of your business. Seasonal operations may only need them at peak times. Year-round farms and ranches should update their cash flow reports each month.
- DO use cash flow reports to time purchasing decisions. Once you can track trends in cash movement, you’ll know the right time to buy or wait.
DON’T
- DON’T just limit yourself to one cash flow report. If your operation has multiple revenue streams, having specific reports for each one can help you understand how your overall business is doing.
For more reading, check out another post we did on “4 Winning Strategies On How To Manage Cash Flow In Your Business.”
Farm Business Planning
Thomas Edison once said, “Good fortune is what happens when opportunity meets with planning.” Others have said, “Failing to plan is planning to fail.” Agriculture businesses are no exception. One could argue that good planning is even more essential on farms and ranches.
DO
- DO have a plan. Taking the time to think through every aspect of your business before you begin will help you avoid a lot of expensive mistakes.
- DO take advantage of resources. There are many organizations dedicated to helping farmers get started on the right foot. For example, the USDA has a great site for creating a business plan.
DON’T
- DON’T forget to include your personal goals. One of the main reasons you start a business is to make your life and your family’s life better. Be sure that you make personal goals a priority as you put your plan together.
There are plenty of resources available to help you with farm business planning. The University of Tennessee Institute of Agriculture has lots available through its Center for Profitable Agriculture. Additionally, Iowa State University has a pretty detailed post on Strategic Planning for Farm Businesses.
Strategic Business Planning is one of the core business services we provide here at CRS CPAs. Schedule a call anytime to learn more.
Tax Planning For Farmers
Even the most basic taxes can be frustrating. Farm taxes can take it to a whole extra level. They come around like clockwork, so it’s best to plan ahead and be prepared.
DO
- DO know what your deadlines are. We list all of them in another post we did on “How Your CPA Can Provide Helpful (and Valuable) Farm Tax Advice This Year.”
- DO go to the source for accurate information. The IRS provides a complete guide to taxes for farmers in Publication 225. (Warning: it can be overwhelming, so call a good CPA when you need a reliable guide.)
DON’T
- DON’T put things off. By working little by little throughout the year, you can avoid the stress and frustration of trying to get everything together all at once.
- DON’T overlook deductions. There are a lot of things on your farm or ranch that could save you a lot of money at tax time. Check out these 17 agriculture tax deductions that can help your farm keep more cash or these 8 really nice tax breaks for farmers.
DO Trust Pros Who Know Farm Bookkeeping And Accounting
Our farming and agriculture accounting services can help you navigate the chaos and confusion of growing a successful business. Not only do we have 40+ years of experience serving ag operations all over West Tennessee through our 6 locations (and around the nation remotely), we’ve got our fingers on the pulse of the future trends of farm accounting. When you’re ready to win with your money, schedule a call to find out how we can help.
